Transaction Causation
Causation in securites cases falls into two categories. *1) transaction causation (also know as "reliance") - an allegation of reliance state that not only **a) a hypothetical reasonable person, but the actual plaintiff, would have considered the omitted fact important in the making of her decision, and **b) that omission or misleading statement did in fact cause or affect her purchase, sale, tender or vote (transaction causation). *2) loss causation - the plaintiff alleges that the defendant's omissions or misleading statements caused the damage to the plaintiff. SEC Rule 14a-9 Proxy rule SEC Rule 14a-9 opinions blend their discussion of the two elements. In Rule 14a-9 proxy solicitation caes, plaintiffs need only: *1) prove materiality and not reliance. For instance, in Mills, the Court held materiality was a permitted substitute for reliance or probable reliance. Thus, a plaintiff alleging proxy violations must demonstrate materiality of the omission, need not demonstrate reliance. *2) For loss causation, two avenues are open to the plaintiff. **2a) they may prove that the solicitation of proxies was an "essential link" in the accomplishment of the defendant's objective (the result about which the plaintiff complains), or ***Thus, not requiring plaintiffs to demonstrate actual monetary loss (that is, that the merger terms were actually unfair), but injury to corporate suffrage rights (a material misrepresentation had occurred and the shareholder voting thereby affected was "an essential link" in the transaction for which defendants sought approval). ***Virginia Bankshares, Inc. v. Sandberg **2b) they may prove that the defendants' misleading statements or omissions foreclosed or caused them to forego state law remedies they may otherwise have pursued. *The relevant passages in the opinion states, "where the misstatement or omission in a proxy staement has been shown to be "material" ... that determination itself indubitably embodies a conclusion that the defect was of such as character that it might - TSC have been considered important by a reasonable shareholder who was in the process of deciding how to vote. This requirement that the defect have a significant propensity to affect the voting process is found in the express terms of Rule 14a-9 itself...There is no need supplement this requirement, as did the Court of Appeals, with a requirement of proof of whether the defect actually had a decisive effect on the voting. Where there has been a finding of materiality a shareholder has made a sufficeint showing of causal relationship ... if, as here, he proves that the proxy solicitation itself, rather than the particular defect in the solicitation materials, was an essential link in the accomplsihment of the transaction." Mill's conclusion - , SEC Rule 10b-5 In a Rule 10b-5 case, court opinions often separately discuss the two types of causation, separating transaction causation ("reliance"), from In a common law fraud case, a plaintiff must plead and prove that he heard or saw the offending misstaement and that it played a significant part in a decision to purchase, invest, tender, or the like. In cases of omission, the plaintiff's task becomes more difficult. Proof that one relied on the absence of information or upon silence is difficult, if not impossible. In the securities area, court have recognized the difficulty of proof of reliance in omission cases. They have recognized that "we can't say A acted, bought, or sold in reliance on what B did not tell him. What we can say in the latter case is that a reasonable investor who knew the omitted fact probably would not have bought or sold." Given proof of materiality, at least in silence cases, we presume reliance: if a resonable investor would have considerd it importatnt if the fact had been disclosed we will presume the particular plaintiff would have considered it important. In Affilitated Ute Citizen of Utah v. United States, two bank employees failed to disclose the ghier price of which sahres were selling in the market made by the abnk. They did not make this disclsorue becaseu they were activley engaged in buying up the sares of the former Ute tribe memebrs who used the banks as custodian for hteir stock. The Tenth Circuit denied a reocvery because the plaintiffs had not proven reliance on any misstatements. The Supreme Court reversed - "under the cirucmstances of this case, invovling primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery. All that is necessary is that hte facts withheld be material in the sense that a reaosnable ivnesotr might would have considered them important in the making of this decision. Given materiality, the presumption of reliance makes particular sense in a caes of face-to-face dealing. The plaintiff may be assumed to have though, "if it was important material he would have told me." After Affiliated Ute, courts nonetheless, extended the presumption of reliance to cases of silence involving share transaction taking place over anonymous markets such as tock exchagnes. More recently, however, this issue has become less important with the development of a reliance substitute called th "fraud on the market " theory, discussed in the following subsection. IN cases of alleged misstaement, hwoever, the requirement that a Rule 10b-5 plaintiff prove reliance may persist. Misrepresentation The reliance issue also arises in cases of misrepresentation. A presumtion of reliance or a reliance substitute versus positivi proof of reliance as an issue looms large because much disclosure litigation is a class action litigation. If proof of individual reliance is requried, and the investor class if oa any size, teh individual issues may overwhelm the common issues. Due ot a perceived lack of commonlaity, or of manageability, teh court may not certify the class under Federal Rule of Civil Procedure 23. IN cases in which the plaintiff is alleging reliance on a misrepresentation, it is not necessary for hte plaintiff actually to have seen the press release, quarterly report, or other docuemnt containing the alleged misstatement. IN such cases proof of indirectr reliacne is sufficient. For exmaple, if the planitff had relied on a broker or other adviser, who had relied upon a newpaper report about the issuer coropration, which in turn had been influenced by the misleading annual report, proof of those facts establishes reliance. If the plaintiff can link her conduct (buying shares) to the defendant's fraud by showing that "the fraud was a 'substantial' or 'significant contributing cause,' the plaintiff has shown sufficient reliacne to support her 10b-5 claims. The plaintiff's reliance must be reasonable. Plaintiffs cannot make out a caes by pointign to representatino of outlandish or preposterous facts. The reasonableness of a plaintiff's reliacen is to be judged with the following factors in midn. In disclosure documents invovlign startup oeprations or projections of future performance, cautionary language will often in essence say, "do not rely on this," or "do not place great reliance on this." Courts have held that in cases in which teh cautionary language is risk-specfici, rahter than generalized boilerplace, the langauge "bespeaks caution." An ivnestor who later claims that the proejctions caused him to prucahse may prove reliance, but will not be able to prove that the reliance was reasonable, given the cautionary lanague. The PSLRA has now introduced a stautotyr safe harbor for forward looking statements (proejctions of revenues or profits, statments of corporate plans or objectives, statments of future economic performance generally, and the like). that are accompanied by "meaningful cautionary statements identifying important factors that could cause actual result fo differ materially forom thsoe in the forward-lookign statement." Corut are directed to entertain motion to dismiss based upon the safe harbor and the rpsence of cautionary language, no matter how great the disparity between the proejction or other ofrward looking statement and thereality which unfolds. The PSLRA safe There are several imrpotant exclusions. For example, the safe harbor is only availabel to SEC reporting companies. It also does not apply to disclsorue docuemnts in conenction with tender offers, intitial public offerings, or penny stock (less than $5 per share) offerings.